Gas prices roar even higher

Posted: Saturday, May 24, 2008

NEW YORK - As consumers began hitting the road Friday for the Memorial Day weekend, they faced the sobering reality that it now costs $87 to fill a Ford Explorer SUV, up $14 from last year, and $72 to fill a mid-sized Honda Accord, up $12.

That's because gas prices, which took another jump higher overnight, are up nearly 20 percent, or 65 cents a gallon, over the past year to average nearly $3.88 a gallon nationally. But unlike this time last year, when gas prices were at their peak for 2007, pump prices now show no signs of halting their daily assault on the record books.

On average, drivers in Alaska, Connecticut, California, New York and Illinois are already paying more than $4 for gas, and an increasing number of stations around the country are posting prices higher than $4. In Alaska, where the average price of regular gas stood at a national high of $4.181 Friday, it now costs $94 to fill an Explorer, and $77 to fill an Accord.

MULTIMEDIA

PRICE OF GAS: Find out how exactly gas prices are set in this click-through chart:

View chart

Nationally, the price of a gallon of regular gas rose 4.4 cents overnight to a record average of $3.875, according to AAA and the Oil Price Information Service. Prices are headed even higher in coming days because of oil's dramatic rally this week to a new record over $135 a barrel.

"We're going to see some more significant increases here in light of what we've seen in the last few days," said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J.

Oil prices fluctuated Friday after as investors placed bets before the long holiday weekend. Light, sweet crude for July delivery rose $1.38 to settle at $132.19 a barrel on the New York Mercantile Exchange, after alternating between gains and losses.

Growing demand for fuel is also helping boost oil prices. Demand for diesel has spiked in China, where power plants in some areas are running short of coal after last week's earthquake. But even before the quake, Chinese diesel imports were rising sharply. China's government has released nearly 170,000 barrels of fuel from its strategic petroleum reserve this week to ensure adequate supplies in earthquake areas.

So how exactly are gas prices set? What determines the hair-pulling figure you see displayed in large electronic or plastic numbers? Why is a gallon of gas, say, $4.11 - not $4.10 or $4.12? Why is the price different across the street?

It all starts with oil.

The biggest factor in the skyrocketing price of gasoline is the historic ascent of crude oil, which has surged from $45 per barrel in 2004 to more than $135 this past week, setting new record highs all the while.

In the first quarter of this year, based on a retail price of gas that now seems like a steal - $3.11 a gallon - crude oil accounted for all but about a dollar, or 70 percent, of the cost, according to the federal government.

The rest is a complex mix of factors, from the cost of turning oil into gas to taxes to marketing costs to, sometimes, nothing more than the competitive whims of your local gas station owner.

Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.

Once oil is pumped from the ground, it can be sold on the spot market, a last-minute trading arena where oil companies and distributors buy and sell to each other, or straight to refiners. After it's brewed into gasoline, the product can again be sold on the spot market, or directly to wholesalers, who in turn can supply their own stations or sell it to other retailers.

Each step of the way, buyers and sellers negotiate a price until, finally, drivers pay the ultimate tab at the pump.

At the starting point of all this is the price of oil - which, like the oil itself, is nothing if not crude.

The knee-jerk villains are the oil companies, fat with multibillion-dollar profits, frequent targets of populist anger. But wait: The oil companies don't set the price of oil or the cost of a gallon of gas.

Prices are a function of the open market, the result of futures contracts being traded on the New York Mercantile Exchange, or Nymex, and other exchanges around the world.

In any case, huge profits at big oil companies aren't because of high prices at the pump. Their massive profits are tied to their exploration and production arms, which are benefiting from record crude prices.